Fannie Mae 2012 Annual Report Download - page 102

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2012 compared with 2011
Net income increased in 2012 compared with 2011, primarily due to a decrease in fair value losses and an increase in
investment gains, partially offset by a decrease in net interest income and an increase in net other-than-temporary
impairments.
Fair value losses decreased in 2012 compared with 2011 primarily due to a decrease in risk management derivatives fair
value losses. The derivatives fair value losses that are reported for the Capital Markets group are consistent with the losses
reported in our consolidated statement of operations and comprehensive income (loss). We discuss our derivatives fair value
losses in “Consolidated Results of Operations—Fair Value Losses, Net.”
The net other-than-temporary impairments recognized by the Capital Markets group are consistent with our consolidated
statements of operations and comprehensive income (loss) as described in “Consolidated Results of Operations—Other-
Than-Temporary Impairment of Investment Securities.” In addition, see “Note 5, Investments in Securities” for information
on our other-than-temporary impairments by major security type and primary drivers for other-than-temporary impairments
recorded during the periods disclosed.
The Capital Markets group reports interest income and amortization of cost basis adjustments only on securities and loans
that are held in our portfolio. For mortgage loans held in our mortgage portfolio, when interest income is no longer
recognized in accordance with our nonaccrual accounting policy, the Capital Markets group recognizes interest income
reimbursements that the group receives, primarily from Single-Family, for the contractual interest due. The interest expense
recognized on the Capital Markets group’s statements of operations is limited to our funding debt, which is reported as “Debt
of Fannie Mae” in our consolidated balance sheets. Net interest expense also includes a cost of capital charge allocated
among the three business segments.
The decrease in net interest income in 2012 compared with 2011 was primarily due to a decrease in the balance of mortgage-
related securities and lower interest rates on loans in our mortgage portfolio. This decrease in interest income on our interest-
earning mortgage assets was partially offset by a decline in interest expense due to lower funding needs and lower borrowing
rates, which allowed us to continue to replace higher-cost debt with lower-cost debt.
Our net interest income and net interest yield were higher than they would have otherwise been because our debt funding
needs were lower than they would otherwise have been as a result of the funds we received from Treasury under the senior
preferred stock purchase agreement and because dividends paid to Treasury are not recognized in interest expense.
We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which includes
prepayment risk. The effect of these derivatives, in particular the periodic net interest expense accruals on interest rate swaps,
is not reflected in the Capital Markets group’s net interest income but is included in our results as a component of “Fair value
losses, net” and is displayed in “Table 13: Fair Value Losses, Net.” If we had included the economic impact of adding the net
contractual interest accruals on our interest rate swaps in our Capital Markets group’s interest expense, the Capital Markets
group’s net interest income would have decreased by $1.4 billion in 2012 compared with a decrease of $2.2 billion in 2011.
Investment gains increased in 2012 compared with 2011 primarily due to a higher volume of portfolio securitizations. In
2012, historically low interest rates and continued high acquisitions of HARP loans contributed to elevated portfolio
securitization volumes.
2011 compared with 2010
Net income decreased in 2011 compared with 2010, primarily due to fair value losses in 2011 compared with fair value gains
in 2010 and a decrease in net interest income, partially offset by a decrease in net other-than-temporary impairments.
Fair value losses in 2011 were primarily due to derivatives fair value losses. The derivatives fair value losses that are reported
for the Capital Markets group are consistent with the losses reported in our consolidated statement of operations and
comprehensive income (loss). We discuss our derivatives fair value losses in “Consolidated Results of Operations—Fair
Value Losses, Net.”
The decrease in net interest income in 2011 compared with 2010 was primarily due to a decrease in the balance of mortgage-
related securities, lower coupon rates on modified loans in our portfolio and an out-of-period adjustment to reduce interest
income on mortgage-related securities in 2011. This decrease in interest income on our interest-earning assets was partially
offset by a decline in funding costs as we replaced higher cost debt with lower cost debt. The reimbursements of contractual
interest due on nonaccrual loans from the Single-Family business were a significant portion of the Capital Markets group’s
interest income during 2011. However, the increase in these reimbursements was offset by the decline in interest income on
our mortgage-related securities because our securities portfolio balance has declined.